The Five Criteria for Every Investment

A recent reader question is from Alex L, who is a member of my Super Sports
Roadster club, a "collaborator-friend," and big help in getting the Miller’s
Money Forever project started:

"Dennis, you started actively managing your portfolio when your CDs got called
in and you were sitting on cash. What do you suggest for people who already
have a portfolio but might want to rearrange it a bit?"

It’s a good question, and one that I’ve been asked frequently. Let me reinforce
one critical point. Do not do what I did and start reading newsletters and
buying into investments because they sound like winners. There is a good chance
you’ll just compound any problems in your portfolio. (I have an article from
my Miller’s Money Weekly service
titled "Getting the Most
from Your Investment Newsletters" that explains how to use investment
research from investment newsletters and make sure it fits into your strategy.)

A major component of my business career was consulting for small businesses.
This was usually a three-step endeavor. First, the client recognized they
had a problem and usually had a pretty good idea of what they needed to do
to solve it. Second, they asked for help because they didn’t know how to implement
their solution. And that’s where I stepped in: putting the solution into action.

Alex L’s question presents a nearly identical situation. Many investors are
uncomfortable with their portfolio balance, and most realize that the solution
is rebalancing things in order to meet their goals, but they need outside
help to rebalance.

Before you make any trades, start with the process. Take each and every investment
you have and build your personal investment pyramid. The Money
Forever portfolio is only a starting point. Each investor has to determine
his own personal allocations. After you have done that, you’ll find the holes
that need to be filled, and where you’re over-allocated.

There are five criteria which should be looked at for every investment:

1. Is it a solid company or investment vehicle?

2. Does it provide income?

3. Is there a good opportunity for appreciation?

4. Does it protect against inflation?

5. Is it easily reversible?

Look at each investment you currently own and see how it stacks up. Safety
is a major concern for two reasons. First, retirees and people approaching
retirement cannot afford to take a major portion of their life savings and
gamble on a Facebook IPO going through the roof. The risk is simply too high.

Second, there is a grey cloud on the horizon called "inflation." The Treasury
Department reports that on February 28, 2006, our government debt ceiling
was $8.2 trillion. On January 31, 2012, Congress approved a debt ceiling of
$16.4 trillion, essentially doubling our debt in six years (because you know
every time they raise it they just spend up to it again).

We did not double our national debt by selling debt instruments to foreign
governments and investors. A major portion of the increase was sold to the
Federal Reserve. In essence, the money was printed or created by accounting
entry. That’s why combating inflation is vital. (Over the years there’s been
a lot of buzz about Treasury Inflation Protected Securities, or TIPS. Many
retirees are finding TIPS are not all they’re cracked up to be. Check out
my recent article on why
TIPS might actually be one worst investments you could make.)

The inflation problem is masked for many investors. In today’s climate, if
you have a high-quality bond or CD, collect the interest and then pay the
tax on that interest, your net yield could be 1% or less. With the Fed printing
plenty of money, a 5% inflation rate is not completely unforeseeable in the
near future. In round numbers, over a five-year period, your principal around
such an inflation rate would buy 82% of what it did five years earlier when
you purchased it.

While I’m approximating to make the point, if you had a $10,000 CD at the
end of a five-year period, your $10,000 would buy what $8,200 bought five
years before. On the other hand, you would need $12,200 to buy what $10,000
bought five years earlier. Your goal is to keep up with and stay ahead of
inflation, not to lose ground along the way.

Using these criteria, look at each investment in your current portfolio and
see how they stack up. Hopefully most do very well. If not, you’ll know where
you might want to begin to liquidate and rebalance.

Find out more about how to apply these criteria to your investments
using my new book, Retirement Reboot; get your
copy here.

Dennis Miller is a 72-year-old retired management consultant, living in Florida
with his wife, Jo.

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